Questions: Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15% Project A: - Initial Cost: -150 - Year 1: 175 - Year 2: 100 1. 78 2. 35 3. 70 4. 55

Solution Steps

To calculate the Net Present Value (NPV) of the given cash flows, we need to discount each future cash flow back to its present value using the required return rate of 15%. The NPV is the sum of these discounted cash flows minus the initial investment. The formula for NPV is:

\[ \text{NPV} = \sum \left( \frac{C_t}{(1 + r)^t} \right) - \text{Initial Cost} \]

where \( C_t \) is the cash flow at time \( t \), \( r \) is the discount rate (15% in this case), and \( t \) is the time period.

To find the Net Present Value (NPV), we first calculate the present value of each cash flow. The cash flows for Project A are as follows:

• Year 1 cash flow: \( C_1 = 175 \)
• Year 2 cash flow: \( C_2 = 100 \)

The present value of each cash flow is calculated using the formula:

\[ PV = \frac{C_t}{(1 + r)^t} \]

where \( r = 0.15 \).

Calculating the present value for Year 1:

\[ PV_1 = \frac{175}{(1 + 0.15)^1} = \frac{175}{1.15} \approx 152.1739 \]

Calculating the present value for Year 2:

\[ PV_2 = \frac{100}{(1 + 0.15)^2} = \frac{100}{1.3225} \approx 75.6410 \]

Next, we sum the present values of the cash flows and subtract the initial cost:

\[ NPV = PV_1 + PV_2 + \text{Initial Cost} \]

Substituting the values:

\[ NPV = 152.1739 + 75.6410 - 150 = 77.8149 \]

Final Answer